The present invention relates to systems and methods for monitoring credit of trading counterparties. More particularly, the present invention relates to systems and methods for monitoring credit of trading counterparties that enable trading systems and credit managers to monitor credit of trading counterparties and thereby control the risk that the trading system and the trading counterparties are exposed to.
In recent years, electronic trading systems have gained wide spread acceptance for trading of a wide variety of items, such as goods, services, financial instruments, and commodities. For example, electronic trading systems have been created which facilitate the trading of financial instruments and commodities such as stocks, bonds, currency, futures, oil, gold, pork bellies, etc. As another example, online auctions on the Internet have become popular markets for the exchange of services and both new and used goods.
Trading systems are frequently operated by individual traders in order to effect trades for legal entities with which they are employed. For example, a bank may employ various traders who participate in trading in the bond market. In trading system, both the traders and the banks may each maintain a trading account, and thus each is a counterparty in the trading systems. Similarly, a holding company may own several banks, and each bank may employ several traders. As above, the holding company may also maintain a trading account, and thus the holding company is also a counterparty in the trading system. The accounts that are held may follow the same type of structural hierarchy. For example, the holding company may have a trading account, each bank may have a sub-account of the holding company's account, and each trader may have a sub-account of their bank's account. In the context of this invention, a customer of a trading system may be any person or entity holding one or more trading accounts and may be also referred to as a counterparty. For example, the holding company may hold its own account as well as the accounts of its banks, and each bank may hold its own account as well as the accounts of its traders. Also in the context of this invention, the holding company is the parent entity of the banks and the banks are the parent entities of their traders.
Many of these electronic trading systems use a bid/offer process in which bids and offers are submitted to the systems by a passive side and then those bids and offers are hit and lifted (or taken) by an aggressive side. For example, a passive trading counterparty may submit a “bid” to buy a particular number of 30 Year U.S. Treasury bonds at a given price. In response to such a bid, an aggressive side counterparty may submit a “hit” in order to indicate a willingness to sell bonds to the first counterparty at the given price. Alternatively, a passive side counterparty may submit an “offer” to sell the particular number of the bonds at the given price, and then an aggressive side counterparty may submit a “lift” (or “take”) in response to the offer to indicate a willingness to buy bonds from the passive side counterparty at the given price.
When trades are entered into by one counterparty submitting a bid or offer and another counterparty hitting or lifting the bid or offer, respectively, a binding contract between the counterparties is entered into. Part of that contract requires that the counterparties each deliver money, goods, and/or services. For example, if a first counterparty bids to buy $100 million in 30 year U.S. Treasury bonds, and a second counterparty hits the bid, the first counterparty has to deliver $100 million in cash and the second counterparty has to deliver the 30 year U.S. Treasury bonds within a predetermined clearing time. This process is referred to as a trade clearing.
Because counterparties have the potential to lose money when trades do not clear because of subsequent changes in market conditions, counterparties frequently desire to, and are frequently required by their parent entities to, limit their risk exposure. One way in which risk exposure can be limited is to place a monetary limit on the amount of trades that can be made in one day. This limit is referred to as a credit limit. The monetary total amount of trades that may be made is referred to as the credit available to the counterparty, and the monetary total amount of trades that have been entered into so far is referred to as the position of the counterparty.
Accordingly, it is an object of the present invention to provide systems and methods for monitoring credit of trading counterparties.